Finding alpha in alternative data is a skill. Investment managers who expect a neatly-wrapped package of actionable insights along with their crop of brand new algorithms will surely be disabused.
Mark Melin writes that it takes plenty of experience for analysts to differentiate signal from noise when it comes to using alternative data. His report was published in Value Walk:
The rapid growth of alternative data is being largely fueled by a new crop of investors seeking to harvest unique alpha type, the Greenwich report showed. Alternative data spending was up a whopping 76% in 2017 and 52% in 2018 with little sign of slowing down, the report surmised. More than half of all quantitative and fundamental investors surveyed recently added alternative data to their strategy toolbox while existing users are going deeper, spending four times more than new market entrants.
A wide majority of investment managers, 72%, said that alternative data was improving enhanced their signal quality in an arena where filtering out signal noise. Of those who are implementing an alternative data strategy, more than one-fifth claim to have received 20% or more of their alpha from the practice. But looking deeper into the data reveals insight into who is benefiting.
Finding alpha with alternative data is not always obvious. Richard Johnson, a principal in Greenwich’s Market Structure and Technology practice who authored the report, told ValueWalk there is likely a learning curve before repeatable success is unlocked.
Nearly one-third of investment managers who have been leveraging alternative data have been doing so for more than three years. Such “power users,” many from a quantitative background, often utilize multiple data sources and are deploying it across diverse strategies and often want the data in raw format. New entrants, most often fundamental in their analytic approach, tend to prefer the data wrapped in a ready to use package after being cleansed.
To Tammer Kamel, CEO of Toronto-based alternative data provider Quandl, the usage progression from quantitative to fundamental asset managers is a natural evolution. Quantitative managers have built in processes for acquiring, cleansing, structuring and manipulating alternative data. “For quants, the jump to alternative data is trivial,” he told ValueWalk. “Fundamental managers love the concept of alt data, but they are ill-equipped to handle it.”
